Allocating the burden of tax: effect of the rules
The effect of IHTA84/S41 is that:
- The tax on any chargeable specific gift (IHTM26011) which bears its own tax (IHTM26003) is deducted from that gift.
- Any exempt specific gift is paid gross - that is without deduction of tax.
- Any chargeable specific gift which is free of tax (IHTM26003) is also paid gross, without deduction of tax. The tax on such gifts is paid out of residue (IHTM26003), even if the residue is wholly or partly exempt.
The residue is dealt with as follows
- tax on the tax free specific gifts above is deducted from the whole residue
- the balance is divided according to the terms of the will or other disposition, and
- the tax on the chargeable part of the residue is then borne by that part, even if there are any provisions to the contrary in the Will
But, the burden of tax attributable to a chargeable specific gift which does not bear its own tax may fall on an exempt share of residue. In our view the tax attributable is calculated as follows:
- the grossed up value of the specific gift
- divided by the total value transferred by chargeable transfer
- multiplied by the total tax on that chargeable transfer